Áù¾ÅÉ«ÌÃ

Every month our bank account is nourished by a hefty amount which for most of us is indispensible for life as we know it. And every year the mail brings us a solid, well designed 38-page report with a four-page summary explaining how the source of it all has been doing over the last year. Most of us glance at it, put it aside, and hope for the best.

Both the report and the summary try to give a clear picture of the state of our pension fund, but succeed doing that only for those who have interest and insight into financial matters. The reason is that pension funds are complicated financial structures, so that, the more accurate the description, the more details are needed.

It is therefore useful to summarize the summary and just give the most important relevant points.

In the first place, there is the return on investments which was a stellar 15.2% in 2006, which comes after 15.0, 11.7, and 14.4% in the three preceeding years. The high rate of return resulted from stock market gains, especially those of global and Canadian markets. The managing costs of the pension fund amounted to 0.25%, which is extremely low compared with mutual fund fees.

After these high returns for the fourth year in a row, which amount to a compound return of 69% over four years, one would expect the funded status indicating the percentage by which the assets (investments) cover the liabilities (future pension payments) to be far above 100%. But while the funded status end 2002, before the high returns, was 81%, it was only 85% end 2006. The main reason was that the long bond interest rate has gone down substantially in recent years. If this rate goes down, paying future pensions becomes more onerous. As less interest will be received in the future, we need more bonds. If the expected contribution of the Alberta Government is taken into account, the funded rate increases to 92%.

The funded or solvency rate of 85% is similar to the average rate of 87% for Canadian Institutional Pooled Funds according to Mercer Investment Consulting.

The investment returns at 15.2% are higher than when the fund had passively followed its set investment policy of spreading its investments over the various categories, which would have given a return of 14.5%. This means that active investment resulted in a 0.7% higher return.

Pension underfunding poses risks for the partners involved in pension funds. Then there are also the risks connected with a stockmarket meltdown. In principle, the sponsors of the plan, in our case the universities and the current faculty members, are responsible, but in dire situations anything may happen. Pension experts such as Keith Ambachtsheer advise a more precise allocation of these risks.

But apart from these dark background thoughts, it can be said that our pension fund is doing relatively well and seems to be managed competently.

For pensioners like us the best advice is not to worry and to enjoy our pensions while we can.